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Aim To Join The 5% Club

Agriculture.com Staff 02/13/2016 @ 5:46pm

During his work with the Farm Credit System in the 1980s, Danny Klinefelter saw his share of farm borrowers struggle.

At the end of that tumultuous decade, though, he reviewed 1982 to 1987 financial statements from the customers of several agricultural lending institutions. What he saw caught his eye, much like a shiny penny at the bottom of a pool.

Some farmers were making money -- good money -- during that time.

Earned net worth (net income after taxes and withdrawals) for the top 25% increased $50,000 annually. Meanwhile, earned net worth for the bottom 25% decreased $25,000 each year.

“Over six years, those in the top 25% were up $300,000; those in the bottom 25% were down $150,000,” says Klinefelter, now a Texas A&M Extension agricultural economist who spoke at this summer's Top Crop Farmer Workshop at Purdue University.

No big difference accounted for this $450,000 gap. Instead, it confirms what Klinefelter calls the “5% rule.” Those in the top 25% were about 5% better than average in terms of:

1. Crop yields.

2. Cost per unit of production.

3. Returns per dollar invested in 
machinery and equipment.

4. Average net price received for 
commodities they produce.

Those in the bottom 25% were 5% below average in these categories.

It's comparable to major league baseball when a career .300 hitter makes millions while a career .250 hitter struggles to make the team each year.

“When you put both of them up to bat 20 times, how many more hits does a .300 hitter get than a .250 hitter?” asks Klinefelter. “One more. He just does it over and over again.”

It's the same way in farming. Over time, seemingly insignificant differences add up to higher profits.

So how do you join the 5% club?

One way is through coordinated revenue and cost management. Typically, farmers glean a discount by prepricing inputs a year in advance. That wasn't the case with fertilizer in 2008, when anhydrous ammonia prices soared to around $1,100 per ton before declining to current prices.

At that time, though, it appeared prices were going higher. Forward sales of $6- or $7-per-bushel corn back then could have covered you in case circumstances changed.

Not so at this year's $3 (or lower) corn prices.

“Lots of folks are waiting to price corn, and they will be upside down,” says Klinefelter. Pairing input purchases with corresponding sales is essential. (For more ideas on how top managers strive to stay ahead of average, check out one of Klinefelter's papers online at http://tepap.tamu.edu/TwentyfiveAttributes.htm.)

A hard truth regarding the competitive market is that it drives average producers to breakeven levels.

“What this means is you better stay at the front half of the pack,” says Klinefelter. By striving to be 5% above average in key areas, you can do so.

During his work with the Farm Credit System in the 1980s, Danny Klinefelter saw his share of farm borrowers struggle.

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